More On Tax Planningfrom The Advisor's Professional Library
- Selected Provisions of the American Taxpayer Relief Act of 2012 The experts of Tax Facts have produced this comprehensive analysis of selected provisions of the American Taxpayer Relief Act of 2012 (the Act) to provide the most up-to-date information to our subscribers. This supplement analyzes important changes to the tax code with emphasis on how these developments impact Tax Facts’ major areas of focus: Employee Benefits, Insurance, and Investments.
- Charitable Giving Charitable giving can reduce your clients’ tax liabilities. However, the general and verification rules for the deduction of charitable gifts must be understood in order to take full tax advantage of such gifts.
Sometimes a glance in the rearview mirror can be invaluable --say, if you're being pursued by your evil nemesis in a high-speed car chase, or if you're Smarty Jones running the stretch at the Belmont Stakes and the horse behind you is gaining fast. Advisors, too, often feel a need to glance over their shoulders, looking back for competitors coming to horn in on their clients and profits. A few years ago, the buzz was all about how accountants were coming to eat advisors' lunches, and for years, the wirehouse behemoths have lumbered about in planners' nightmares, their massive marketing budgets causing advisors' knees to knock and lips to tremble. But forget about them for a minute. Here's something else to worry about: Law firms.
If you want one-stop shopping for everything from trusts and estates to investment management and tax preparation, step right up, says Joe Votava, an attorney, CPA, and planner at the Rochester, New York, offices of law firm Nixon Peabody, LLC. Want an estate attorney to draft your will? A CPA or tax attorney to review your tax returns? A CFP to direct your investments and review your insurance coverage? A trust officer to manage your family foundation? Think of anything on a menu of finance-related services, and chances are that Votava and his colleagues can provide it.
Granted, in many states, law firms aren't allowed to manage money at all. One exception is Massachusetts, where several large law firms manage billions of dollars on behalf of their clients, thanks to an exception in securities laws. "Lawyers have been managing money in Boston for 100 years," says Votava. But the law firm of Nixon Peabody, which has offices in 16 states, has surmounted this hurdle by forming Nixon Peabody Financial Advisors LLC, a financial planning subsidiary wholly owned by the law firm and registered as an RIA. "There are rules out there that permit lawyers and accountants to give financial advice that's incidental to their profession, but we had a pretty big business going that wasn't incidental anymore," says Votava, 50, who now serves as president of the four-year-old subsidiary. "We couldn't register the law firm as an investment advisor, so we formed the subsidiary and registered it instead." Votava's financial planning clients generally invest through the Schwab or SEI platforms, but thanks to a recent merger of Nixon Peabody LLC and a Boston-based law firm (Hutchins, Wheeler & Dittmar) that's been running a full-service trust operation for decades, they can even have their trusts managed in-house, too.
The all-in-one approach isn't without its legal and regulatory headaches. "We didn't build this because it was an easy business model; it's a very hard model," Votava says wryly. Yet if he had it to do all over again, Votava says he wouldn't change a thing. Clients love the fact that they can get expert advice on such a wide array of financial issues, and as the financial services industry evolves, he expects that firms like his will become more common and popular. "We have to struggle with [the limitations of being a planning firm owned by a law firm] every day, but clients see the broad perspective and counseling we can offer and say, 'Jeez, this is fabulous.' When you get 10 family trusts going, and a foundation, and two private businesses going, after a while, the sheer amount of paperwork just blows people away," he says. "We aren't charging small potatoes"--an understatement, since client fees often range from $20,000 to $100,000 per year--"but if clients had different firms doing all of the different pieces of the puzzle for them, it could easily cost them twice as much. I think that, long-term, it's a winning model."
Nixon Peabody didn't set out to become a purveyor of financial wisdom; indeed, the law firm's path into planning has been a sinuous one. The firm first began offering financial counsel to individuals in 1969, when it began advising the executives of its client corporations on such matters as tax law changes and insider-trading rules. Within a few years, the firm was counseling individuals on their tax shelters, and as an added service, offered to have the firm's paralegals and staff prepare clients' taxes. As the tax shelter industry hit its stride in the early '80s (and brought with it a slew of compliance rules), the firm got serious about accounting and hired several CPAs, including a certain Joe Votava, then a CPA and attorney at Coopers & Lybrand. Then, when many popular tax shelters got the axe in 1986, the firm turned its attention to clients' increasingly self-directed retirement planning, specifically their 401(k)s, and Votava began taking a more comprehensive approach to clients' financial planning. "We started doing asset allocations, and putting net worth statements together, and talking about investments and insurance," he says.
Clients paid for planning services just like they paid for legal services: on an hourly basis, tracked in six-minute intervals. Votava also began studying for his CFP certification, which he received in 1994, and he got involved with the International Association for Financial Planning (IAFP), first locally and then on the national level. "Getting involved" is a bit of an understatement: Votava was the IAFP president when it and the Institute of Certified Financial Planners (ICFP) merged to become the Financial Planning Association in 2000.
Over the years, the firm's financial advice business became less and less "incidental" to its legal and accounting work. As business continued to grow, "we kept saying to ourselves, 'You know, we're doing a lot of financial planning and investment counseling, and we're probably looking at $2 to $3 billion that our clients have,'" says Votava. "'That's a lot of money! And we're giving them a lot of significant advice on it. Maybe we should be registered as investment advisors.'" When clients began asking for help in implementing the financial advice they were receiving from the firm, the decision finally made itself. Unable to register the law firm as an advisor, Nixon Peabody formed an RIA subsidiary instead.
Interestingly, Votava says that the decision to open the RIA was less about beefing up revenues through asset management fees than about reducing hassle and extra costs. "We're not in that part of the business to make money; we're in it to reduce the flow of paper--the duplicate statements and confirmations and tax documents [from clients' money managers]. If we can get electronic downloads of all that, we can do our work much more efficiently," he says. "We want to manage money not to make money on the process, but to reduce our cost of the hourly work we're doing. If we didn't do this, we'd eventually price ourselves right out of business." Votava's clients generally pay a total of 75 to 150 basis points for asset management services, inclusive of mutual fund expenses, if any.
Privileges and Conflicts
Whatever its genesis, the subsidiary is something of an odd bird. From a legal standpoint, it is its own separate little island, yet all of the six people who work there, including Votava, have one foot in the RIA and one foot on the law firm's mainland; they split their time between the two entities. Clients of the subsidiary often consult partners in both entities, say, a CFP in the subsidiary and a tax attorney in the law firm. They also may consult the same person in different capacities. For example, one day Votava might advise them as their lawyer, the second day he might provide advice as an advisor. Confused yet? Clients sometimes are, but Votava says they're willing to put up with some confusion to gain the practical benefits of one-stop shopping.
The real sufferers in this scenario may actually be the planners and attorneys who have to keep everything straight. For instance, as any "Law & Order" or "CSI" buff can tell you, the conversations between a lawyer and a client are privileged under the law; if a client tells a lawyer something, the lawyer is legally obliged to keep the client's secrets. The conversations between a planner and his client, however, are not privileged, so Votava and his colleagues have to be very clear about when they're acting as lawyers and when they're acting as planners. "If they don't have privilege, we just have to tell them that," he says. On the issue of privacy in general, however, Votava says, "I think we would just err on the side of doing whatever we would do as lawyers--maintaining the same principles of a very high degree of confidentiality and privacy in the advisory subsidiary that we do in the law firm."
Another wrinkle caused by the marriage of law and finance is conflicts of interest--no, not the commission-bred kind. Let's say a prospect waltzes in the door, plunks down her $10 million portfolio, and asks to sign on the dotted line. Before anybody signs anything, Votava has to find out whether the prospect or any of her business interests are involved in any of the firm's pending litigation. "In a law firm as large as ours, we run into situations all the time where, when we put their names into our computer, we find that we're suing their company out of our Boston office, or we represent a company that's in a contractual dispute with them," he says. Even if the prospect is sitting in Votava's Rochester, New York, office and the suit is being brought by a client of the firm's San Francisco office, he's still not permitted to take on the prospect as a client, for fear of creating future conflicts of interest. "We have to go through that screening process on every new client that comes in, to make sure that we can represent them as zealously as a lawyer would represent their client," he says. "That can be something of a barrier to new business, but it's important to us."
The firm's long arms also force Votava to tread cautiously when making investment decisions for his clients. "As a law firm, we represent a lot of companies with respect to their private placements and offerings, so we have to be very careful," he says. "You could be sued overnight if somebody thought you made a transaction based on inside information."
Top of the Heap
While many advisors spend their days helping clients build retirement nest eggs, Votava's clients generally already have several gleaming nest eggs, not to mention several nests, as well as private jets to help them flit between them. About 60% of them are high-level executives from around the country; the remainder are independently wealthy families and retirees. Average net worths range from $5 million to $100 million. "They're really the highest-level clientele in the country you could have, short of them forming their own family offices," says Votava. Judging from their ample bank accounts, you might expect this crowd to go skipping blithely through life without a care in the world, but Votava says that's not the case. "I've been doing this a long time, and it's funny: The more money people get, the more fearful they get, and they end up being almost as stressed as when they were only making $20,000 and were worried about paying the electric bill. There are emotions and fears at all levels, and wealth doesn't solve everything."
For the executives, the focus is often on the complicated benefit plans available only to senior officers of public companies. Votava and his colleagues sort through layers of special benefits and contracts, and put them in the context of the client's total financial picture.
For the families and retirees, the emphasis is often on what to do with their wealth now that they've accumulated it. How can they avoid paying too much in taxes? How can they teach their children to be good stewards of their wealth while also preventing them from turning into spoiled little monsters? With what charitable causes should they share their bounty?
At times, this last concern has to be raised by Votava, rather than the client, but he's not afraid to do it. "Sometimes you sit there and you think, 'Jeez, you have $2.5 million in income on last year's tax return, and you have $250 in charitable contributions. Let's think about this for a minute. Do you think you really deserve $2.5 million in income? Do you not owe anything to society--do you have no obligation to take care of somebody?'" he says.
Fortunately, a few diagrams and numbers often do the trick. Votava pulls out a chart and tells them, "When you die, this will be your estate. $30 million is going to be written in a check to Uncle Sam, and Uncle Sam is going to spend 70% of that on the military, and x% on Medicare, and x% on these other items. Don't you have some group that you know and care about that you would like to see more of this aimed at? You don't have to give it to the government to give away; you can give it away yourself." After some reflection--sometimes minutes, sometimes years--most clients come up with something. The exact structure of their intended gifts is not always what Votava would have drawn up, but that's what keeps it interesting, he says. "They come back to you with their own twist on it, and say, 'Hey, can we do this?' Then we have to figure out how to set it up, which makes it a creative process."
Moment by Moment
Such creativity doesn't always bloom in a hurry, and many clients are unnerved by the idea of discussing such matters while the lawyer's time clock is ticking. As a result, Votava offers several payment options for his clients: They can pay an annual retainer, a fee based on assets under management, or an hourly fee. Fifty percent of his clients still choose the hourly fee (it's $300 to $500 per hour, depending on where the client lives and the complexity of the work involved), but 35% have opted for the annual retainer, and about 15% pay a percentage of assets under management. The clients paying under the latter two models "don't want to pay for every time they make a phone call to us; they just want to know that it's going to be twenty grand a year and they'll send us five grand every quarter, and that's that," says Votava. "They really hate the idea of a meter ticking every time they pick up the phone." Votava keeps track of his time in six-minute intervals, regardless of how the client is paying for his services. If the clients are paying hourly, he uses the elapsed time to total up the client's bill; if they're paying some other way, he can use the data to track how profitably (or unprofitably) he is using his time.
As advisors continue to explore the many ways to structure a financial advisory firm, Joe Votava's one-stop, law-firm-owned shop presents both appealing benefits and fairly daunting obstacles. For advisors serving clients who have less wealth or less complicated lives than Votava's clients, a law firm link may create more headaches than opportunities. For advisors serving the jet-setting end of the client spectrum, however, the appeal to clients may justify the extra effort. What's right for your clients? Only you can be the judge.
Assistant Managing Editor Karen Hansen Weese can be reached at email@example.com.